These 4 Measures Indicate That Jyothy Labs (NSE:JYOTHYLAB) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jyothy Labs Limited (NSE:JYOTHYLAB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jyothy Labs

What Is Jyothy Labs's Debt?

You can click the graphic below for the historical numbers, but it shows that Jyothy Labs had ₹1.67b of debt in March 2021, down from ₹3.35b, one year before. But it also has ₹1.92b in cash to offset that, meaning it has ₹251.8m net cash.

How Strong Is Jyothy Labs' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jyothy Labs had liabilities of ₹4.73b due within 12 months and liabilities of ₹925.6m due beyond that. Offsetting this, it had ₹1.92b in cash and ₹998.3m in receivables that were due within 12 months. So its liabilities total ₹2.74b more than the combination of its cash and short-term receivables.

Of course, Jyothy Labs has a market capitalization of ₹61.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Jyothy Labs boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Jyothy Labs grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jyothy Labs can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jyothy Labs has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jyothy Labs actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Jyothy Labs's liabilities, but we can be reassured by the fact it has has net cash of ₹251.8m. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in ₹3.8b. So is Jyothy Labs's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jyothy Labs you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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